Daily Newsletter, Saturday, 10/11/2008

Table of Contents

Market Wrap

Freaky Friday

by Jim Brown

Friday's 1,018-point range on the Dow was a fitting end to a very scary week. It was the worst week ever for the Dow. Worse than 1987 and worse than 1929. The Dow lost -18.15% for the week and at the low it was down -3601 points or -31% in just the last three weeks. Friday's opening dip hit a low of 7882 and a level not seen since March of 2003. Ugly does not even begin to describe the market action over the last week.

There were no material economic reports on Friday but after the Dow gapped down 700 points any reports would have been ignored. The global markets imploded on Friday and the U.S. markets followed suit. A large Japanese insurance company filed bankruptcy and Iceland's banking crisis worsened. Those were just two examples of negative news impacting global market sentiment with losses for the week of more than -20% not uncommon. The Indonesian markets were closed to avoid further panic and several other countries considered that option.

The Dow fell over 700 points at the open and quickly rebounded into positive territory on hopes the dip to 7882 was a climax bottom. The rebound was quickly sold and another -600 point drop appeared. When there was no crush of selling at 3:PM and the Lehman auction closed successfully traders decided to cover some shorts and the Dow quickly rebounded +870 points to +322. As traders held their breath ahead of the close we saw the sellers reappear again and knock -450 points off the bounce to close down -128. It was the biggest intraday range ever for the Dow and the biggest weekly loss.

The problem continues to be fund liquidations to cover record redemptions and margin selling by retail investors. For instance the CEO of XTO was forced to sell $101 million in company stock when he received a margin call he could not make. The CEO of Chesapeake (CHK) and the largest individual shareholder with 33.5 million shares (5.8% of outstanding worth nearly $1 billion at his cost but only $500 million today) was forced to sell all of his position to meet margin calls. Aubrey McClendon had been a constant buyer of CHK stock for cash and then on margin as Chesapeake's future brightened. The sudden collapse of the energy sector and the markets in general produced margin calls on nearly every margined stock over the last three weeks. He is just one individual out of millions that was forced to sell.

Investors receiving margin calls were forced to sell other positions in addition to the ones being hit by calls. This domino effect squeezes investors in stages. First there is denial of the initial drop and some minor covering to rebalance the portfolio. Traders then double down in an attempt to recover losses from this "obviously oversold" dip. Next comes shock that the market continued down and the dip was a crash and they have to rebalance again. Then comes realization that the sell off was worse than they expected and could get worse. The pain threshold increases and some positions are liquidated. As the selling continues eventually you get capitulation as dejected and broken investors dump remaining positions either in disgust or by forced margin selling. We are nearing the capitulation phase and the -700 point Dow drop on Friday was initially thought to be that capitulation spike. The NYSE said margin debt had fallen by 25% during the third quarter. I would bet it has dropped a lot more since October 1st. The last week has seen more margin selling than any prior week but the actual numbers wont be out for some time.

The liquidation has been extreme. TrimTabs said funds saw record outflows in September of $72 billion. In just the first week of October another $50 billion was withdrawn. That was $43 billion from stock funds and $7 billion from bond funds. Since many funds are leveraged from 2:1 to 8:1 that is a lot of buying power leaving the market.

The forced liquidation was extremely evident in the markets. In the first 20 minutes of the futures market crude prices fell -$5 on 10 times the average volume. It was clearly a major position dump by a major fund(s). When the equity markets opened any stock with a high stock price was crushed. Exxon (XOM) dropped another $10 to $56 and this was on top of a -$9 drop on Thursday. The same was true for Chevron and Conoco. Google lost $20 intraday before rebounding to close positive. Rio Tinto (RTP) lost -$25 before rebounding. Gold lost -94 intraday before rebounding at the close. Goldman Sachs dropped -26 to $74 before rebounding and this was on top of a -$20 drop on Thursday. Part of Goldman's problem was fear over the Lehman auction and another downgrade but the trend was clear. Prior winners and places where funds thought they could safely store money while waiting for the market to recover were sold hard to raise cash. There are no favorites left and no safe place for hiding cash.

Chevron Chart - Daily
Crude Oil Chart - Daily

The Volatility Index (VIX) hit a new record high of 76.94 on Friday as the market volatility hit extreme levels. The 1000-point swing in the Dow and going from sharply negative to sharply positive twice was unheard of in market history. The current VIX or "new" VIX is based on the SPX where the "old" VIX was calculated on the OEX. The old VIX hit a high over 100 in the 1987 crash. The old VIX had fewer stocks (100) and according to the CBOE the new VIX on the SPX should be less volatile. I would equate Friday's VIX at 77 to be equal to the 100 in the 1987 crash.

Volatility Index Chart - Daily

Weighing on the markets Friday morning was the Lehman CDS auction. Lehman had over $400 billion in debt covered by credit default swaps. In order for debt holders to exercise the default insurance a value on the debt needs to be set. This is done by an auction. Lehman's debt was auctioned for 8.625 cents on the dollar. That means a $100 in debt was sold for $8.65. The debt holder can now bill the writer of the default insurance for the difference or $91.35 per $100 of debt. This means insurers will have to pay $365 billion to holders of the debt. The International Swaps and Derivatives Association (ISDA) has only had to run nine of these auctions since 2005 but has five this month alone including WaMu. Traders were worried that the size of the insurance payments would cause further bankruptcies when the writers of the swaps were unable to come up with the billions in cash. After the auction the ISDA said it was successful and there were no failures. All insurers had put up collateral to cover their liabilities. In fact the ISDA said after taking into account the offsetting positions only about $8 billion in actual payments would change hands. Insurers had been very active in offsetting and hedging their positions. The feared disaster had been averted and the market rallied +800 points off the lows.

On the earnings front you have to look hard to get any earnings news. Since all the earnings news is negative the market reporters are ignoring it to focus on the market drop. GE reported earnings on Friday that fell -22%. The earnings of 43 cents hit GE's own lowered forecast and they blamed the drop on its struggling finance division. Even GE has had to raise capital by selling $15 billion in stock and an additional $3 billion in preferred shares to Warren Buffett. GE rose +2.49, mostly at the close, as traders breathed a sigh of relief and shorts covered their positions. Several analysts expressed concern that GE was likely to lower their earnings forecast again once the smoke clears. They still have $88 billion in commercial paper and even with their AAA rating this expense is weighing on their results.

The Nasdaq managed to bounce back to positive territory mostly on the back of a +$12 rebound in Apple. The chip sector plus Microsoft was a major drag after the Micron warning on Thursday. Micron said it was cutting its global workforce by 15% and said it was slashing output of NAND chips in its joint venture with Intel because of weak demand. Most of the 2,800 jobs to be lost will be in Boise Idaho. Micron said customers were calling and saying they could not pay for chips already shipped because they can't access their lines of credit. Micron said selling prices for chips had fallen significantly below the manufacturing cost. This is not good news for the tech sector and suggests tech earnings could be weak. Intel will report earnings on Tuesday and there are numerous other chip stocks reporting.

Financials are still struggling despite weeks of different bailout plans. As Micron reported many companies are facing a cutoff of capital as bank funding dries up. American Express said on Friday that 18% of small businesses were in danger of failing due to a sudden lack of financing. A survey out Friday showed that banks making loans had dropped by -60% over the last six months and were at levels not seen since the Carter administration. Money is drying up at a faster rate than ever before in this crisis. The FDIC announced on Friday they closed the Meridian Bank in Illinois and Main Street Bank in Northville Michigan. The FDIC has 117 banks on its danger list but that may only scratch the surface. RBC Capital said they expect 300 banks to be closed over the next three years. Bauer is tracking 426 banks in danger. Weiss Research says 1479 banks and 158 thrifts with $3.2 trillion in assets are in danger. That equates to 1 in every 9 banks. Obviously the problem is probably worse than the low FDIC estimates but probably not as bad as Weiss claims. Somewhere in the middle is where everything will settle but unless banks raise capital and are able to make loans the rest of the economy will crash before the banks fail. Most banks have raised interest rates and lowered credit lines on credit cards. Home equity mortgages are almost impossible to get and business loans are extremely tight. A reader told me this week a high net worth friend with a 750 credit score tried to get a car on a 3-year lease. He was denied even though he offered to pay the entire three-year lease in advance. A GM car dealer in the business for 30 years reported on Friday that business was down 50% from August levels because he could not get financing for customers and shoppers did not want to commit to a big debt on a car in this economy. There is simply no money in the market and things may get worse before they get better.

Countrywide notified one million customers last week that their home equity line of credit had been canceled. Despite the bailout Washington Mutual is notifying customers that they will not have access to any unused credit on their cards or home equity loans. If you had a card with $10,000 in credit and a $4000 balance then your new credit line is $4000. This is then reported to the credit bureau and it shows up as a maxed out credit line and that lowers your credit score even though you did nothing wrong.

Another problem is the failure of the Letter of Credit market. Suppliers require a letter of credit from a purchaser before they load the goods for a global shipment. This assures them they can get paid when the goods arrive. At least that was how it worked in the past. The system has broken down with banks refusing to issue letters of credit or worse, refuse to accept them as collateral for payment because they are not confident in the issuing banks ability to pay. According to Commodity Information Systems there are all kinds of stuff stacked up on docks right now that can't be shipped because the buyers can't provide an acceptable letter of credit. If this continues for another 2-3 weeks the global economy will begin to slow rapidly from lack of inventory and components.

Iceland moved one step closer to having to ask the IMF for a bailout. Iceland shutdown the last of three major banks on Thursday. The top three banks had liabilities of $140 billion and 10 times the GDP of Iceland. The Icelandic stock exchange was shutdown and trading in the Icelandic krona ceased with no foreign banks willing to take the currency. Without an IMF bailout Iceland will be bankrupt. The three banks had been paying very high yields and had attracted deposits from all over the world. They had more depositors than citizens. Under the government takeover only individual accounts of Icelandic citizens were protected. Foreign accounts were not protected. Numerous EU organizations, city councils, even Scotland Yard lost millions in the failures. England and the Netherlands have already gone to court. The UK is freezing assets of Iceland in the UK.

After the bell on Friday Hank Paulson announced that the G7 had decided on a comprehensive program to help with the financial crisis. The details were sketchy but it appears the Treasury will buy non-voting stock in financial institutions in an effort to shore up the banking system. The lack of details in the official announcement suggests the group is not yet clear on the details but knew everyone had been waiting on news all afternoon on Friday. This was an announcement to calm traders ahead of the three-day weekend for banks. Monday is Columbus Day and a bank holiday. I expect further announcements before Monday. We desperately need a positive announcement because the IMF issued a warning on Saturday that the world was on the brink of a global financial meltdown. The U.S. appealed for patience but the IMF said there was no time after the G7 failed to present a comprehensive plan on Friday. The IMF said the potential failure of several global institutions had pushed the global financial system to the brink of a systemic collapse. The G20 was scheduled to meet on Sunday. There is also a meeting of the Euro Zone nations on Sunday.

Not all the news was bad. Art Hogan at Jefferies called Friday a bottom. Unfortunately he was the only one and there were plenty of other analysts suggesting a far different scenario. The general consensus felt the afternoon rebound and then failure of that rebound was just short covering ahead of the weekend and an entry point for sellers on Monday. Market bottoms rarely come on Fridays. Bottoms are typically formed on Mondays and Tuesdays after an ugly week of selling. The consensus appears to be expecting another washout next week that knocks the Dow back to 7500-7700 and the support lows from 2002-2003. That is seen as major support and a level where reluctant buyers venture back into the market. Unfortunately until investors quit taking money out of funds the selling will not be over.

Also after the bell news broke that GM and Chrysler were in talks over a possible merger. Analysts aware of the deal said chances were better than 50:50 it would happen. GM originally approached Ford about a deal but the two companies could not come to terms. GM and Ford both denied bankruptcy rumors last week. The reasoning behind the GM Chrysler deal is massive cost cutting for the combined entity and regain market share against foreign rivals. It was thought the combined entity could garner further concessions from the government after they showed billions in reduced costs. It is easier to bailout one entity than two. It is also well known that Cerberus is willing to try anything to rid itself of Chrysler. They bought the troubled carmaker just before oil prices rocketed from $60 to $147. Chrysler lost $1.6 billion last year and sales are down 25% in 2008. GM is burning cash at the rate of $1 billion per month and has only $16 billion in reserve. Sales are down 18% and GM has lost $57.5 billion in the last 18 months, primarily due to tax accounting changes. The WSJ said on Friday that Cerberus might trade Chrysler to GM for the 49% stake in GMAC that it does not already own.

I really wanted to believe that the -700 point drop at Friday's open and rebound back to positive territory was a capitulation bottom. When sellers returned to push the Dow back to 7973 jut before 2:PM I realized it was just wishful thinking.

This is not an average bear market but a bear caused by the collapse of the global financial system. There have been 12 bear markets since 1890. An average bear market falls -33.8% but the worst went to -60%. October 10th was the one-year anniversary of the market high in 2007 at 14167 on the Dow. Over the last 12 months the Dow has declined -39.6% to Friday's close at 8551. On an average basis we should be near a bottom but the cause of the problem has not been fixed. Investors typically come off the sidelines before the economy recovers but nearly everyone believes the economy has fallen off a cliff over the last month. We are far from an economic bottom and that suggests there could be lower lows ahead. October is known as the bear killer month because of the number of bear market bottoms in October. I would love to believe we will see a bottom next week but that will not happen until redemptions stop and reverse into deposits. Money market funds actually saw a rise in deposits last week so maybe that crisis has finally ended. Reportedly investors are moving money to checking accounts and money markets rather than leave funds in brokerage accounts that may be in danger of failing. If funds are waiting patiently in money markets they can be put back into brokerage accounts rather quickly. Weighing on the markets Friday morning was the Lehman CDS auction. Lehman had over $400 billion in debt covered by credit default swaps. In order for debt holders to exercise the default insurance a value on the debt needs to be set. This is done by an auction. Lehman's debt was auctioned for 8.625 cents on the dollar. That means a $100 in debt was sold for $8.65. The debt holder can now bill the writer of the default insurance for the difference or $91.35 per $100 of debt. This means insurers will have to pay $365 billion to holders of the debt. The International Swaps and Derivatives Association (ISDA) has only had to run nine of these auctions since 2005 but has five this month alone including WaMu. Traders were worried that the size of the insurance payments would cause further bankruptcies when the writers of the swaps were unable to come up with the billions in cash. After the auction the ISDA said it was successful and there were no failures. All insurers had put up collateral to cover their liabilities. In fact the ISDA said after taking into account the offsetting positions only about $8 billion in actual payments would change hands. Insurers had been very active in offsetting and hedging their positions. The feared disaster had been averted and the market rallied +800 points off the lows.

On the earnings front you have to look hard to get any earnings news. Since all the earnings news is negative the market reporters are ignoring it to focus on the market drop. GE reported earnings on Friday that fell -22%. The earnings of 43 cents hit GE's own lowered forecast and they blamed the drop on its struggling finance division. Even GE has had to raise capital by selling $15 billion in stock and an additional $3 billion in preferred shares to Warren Buffett. GE rose +2.49, mostly at the close, as traders breathed a sigh of relief and shorts covered their positions. Several analysts expressed concern that GE was likely to lower their earnings forecast again once the smoke clears. They still have $88 billion in commercial paper and even with their AAA rating this expense is weighing on their results.

The Nasdaq managed to bounce back to positive territory mostly on the back of a +$12 rebound in Apple. The chip sector plus Microsoft was a major drag after the Micron warning on Thursday. Micron said it was cutting its global workforce by 15% and said it was slashing output of NAND chips in its joint venture with Intel because of weak demand. Most of the 2,800 jobs to be lost will be in Boise Idaho. Micron said customers were calling and saying they could not pay for chips already shipped because they can't access their lines of credit. Micron said selling prices for chips had fallen significantly below the manufacturing cost. This is not good news for the tech sector and suggests tech earnings could be weak. Intel will report earnings on Tuesday and there are numerous other chip stocks reporting.

Financials are still struggling despite weeks of different bailout plans. As Micron reported many companies are facing a cutoff of capital as bank funding dries up. American Express said on Friday that 18% of small businesses were in danger of failing due to a sudden lack of financing. A survey out Friday showed that banks making loans had dropped by -60% over the last six months and were at levels not seen since the Carter administration. Money is drying up at a faster rate than ever before in this crisis. The FDIC announced on Friday they closed the Meridian Bank in Illinois and Main Street Bank in Northville Michigan. The FDIC has 117 banks on its danger list but that may only scratch the surface. RBC Capital said they expect 300 banks to be closed over the next three years. Bauer is tracking 426 banks in danger. Weiss Research says 1479 banks and 158 thrifts with $3.2 trillion in assets are in danger. That equates to 1 in every 9 banks. Obviously the problem is probably worse than the low FDIC estimates but probably not as bad as Weiss claims. Somewhere in the middle is where everything will settle but unless banks raise capital and are able to make loans the rest of the economy will crash before the banks fail. Most banks have raised interest rates and lowered credit lines on credit cards. Home equity mortgages are almost impossible to get and business loans are extremely tight. A reader told me this week a high net worth friend with a 750 credit score tried to get a car on a 3-year lease. He was denied even though he offered to pay the entire three-year lease in advance. A GM car dealer in the business for 30 years reported on Friday that business was down 50% from August levels because he could not get financing for customers and shoppers did not want to commit to a big debt on a car in this economy. There is simply no money in the market and things may get worse before they get better.

Countrywide notified one million customers last week that their home equity line of credit had been canceled. Despite the bailout Washington Mutual is notifying customers that they will not have access to any unused credit on their cards or home equity loans. If you had a card with $10,000 in credit and a $4000 balance then your new credit line is $4000. This is then reported to the credit bureau and it shows up as a maxed out credit line and that lowers your credit score even though you did nothing wrong.

Another problem is the failure of the Letter of Credit market. Suppliers require a letter of credit from a purchaser before they load the goods for a global shipment. This assures them they can get paid when the goods arrive. At least that was how it worked in the past. The system has broken down with banks refusing to issue letters of credit or worse, refuse to accept them as collateral for payment because they are not confident in the issuing banks ability to pay. According to Commodity Information Systems there are all kinds of stuff stacked up on docks right now that can't be shipped because the buyers can't provide an acceptable letter of credit. If this continues for another 2-3 weeks the global economy will begin to slow rapidly from lack of inventory and components.

Iceland moved one step closer to having to ask the IMF for a bailout. Iceland shutdown the last of three major banks on Thursday. The top three banks had liabilities of $140 billion and 10 times the GDP of Iceland. The Icelandic stock exchange was shutdown and trading in the Icelandic krona ceased with no foreign banks willing to take the currency. Without an IMF bailout Iceland will be bankrupt. The three banks had been paying very high yields and had attracted deposits from all over the world. They had more depositors than citizens. Under the government takeover only individual accounts of Icelandic citizens were protected. Foreign accounts were not protected. Numerous EU organizations, city councils, even Scotland Yard lost millions in the failures. England and the Netherlands have already gone to court. The UK is freezing assets of Iceland in the UK.

After the bell on Friday Hank Paulson announced that the G7 had decided on a comprehensive program to help with the financial crisis. The details were sketchy but it appears the Treasury will buy non-voting stock in financial institutions in an effort to shore up the banking system. The lack of details in the official announcement suggests the group is not yet clear on the details but knew everyone had been waiting on news all afternoon on Friday. This was an announcement to calm traders ahead of the three-day weekend for banks. Monday is Columbus Day and a bank holiday. I expect further announcements before Monday. We desperately need a positive announcement because the IMF issued a warning on Saturday that the world was on the brink of a global financial meltdown. The U.S. appealed for patience but the IMF said there was no time after the G7 failed to present a comprehensive plan on Friday. The IMF said the potential failure of several global institutions had pushed the global financial system to the brink of a systemic collapse. The G20 was scheduled to meet on Sunday. There is also a meeting of the Euro Zone nations on Sunday.

Not all the news was bad. Art Hogan at Jefferies called Friday a bottom. Unfortunately he was the only one and there were plenty of other analysts suggesting a far different scenario. The general consensus felt the afternoon rebound and then failure of that rebound was just short covering ahead of the weekend and an entry point for sellers on Monday. Market bottoms rarely come on Fridays. Bottoms are typically formed on Mondays and Tuesdays after an ugly week of selling. The consensus appears to be expecting another washout next week that knocks the Dow back to 7500-7700 and the support lows from 2002-2003. That is seen as major support and a level where reluctant buyers venture back into the market. Unfortunately until investors quit taking money out of funds the selling will not be over.

Also after the bell news broke that GM and Chrysler were in talks over a possible merger. Analysts aware of the deal said chances were better than 50:50 it would happen. GM originally approached Ford about a deal but the two companies could not come to terms. GM and Ford both denied bankruptcy rumors last week. The reasoning behind the GM Chrysler deal is massive cost cutting for the combined entity and regain market share against foreign rivals. It was thought the combined entity could garner further concessions from the government after they showed billions in reduced costs. It is easier to bailout one entity than two. It is also well known that Cerberus is willing to try anything to rid itself of Chrysler. They bought the troubled carmaker just before oil prices rocketed from $60 to $147. Chrysler lost $1.6 billion last year and sales are down 25% in 2008. GM is burning cash at the rate of $1 billion per month and has only $16 billion in reserve. Sales are down 18% and GM has lost $57.5 billion in the last 18 months, primarily due to tax accounting changes. The WSJ said on Friday that Cerberus might trade Chrysler to GM for the 49% stake in GMAC that it does not already own.

I really wanted to believe that the -700 point drop at Friday's open and rebound back to positive territory was a capitulation bottom. When sellers returned to push the Dow back to 7973 jut before 2:PM I realized it was just wishful thinking.

This is not an average bear market but a bear caused by the collapse of the global financial system. There have been 12 bear markets since 1890. An average bear market falls -33.8% but the worst went to -60%. October 10th was the one-year anniversary of the market high in 2007 at 14167 on the Dow. Over the last 12 months the Dow has declined -39.6% to Friday's close at 8551. On an average basis we should be near a bottom but the cause of the problem has not been fixed. Investors typically come off the sidelines before the economy recovers but nearly everyone believes the economy has fallen off a cliff over the last month. We are far from an economic bottom and that suggests there could be lower lows ahead. October is known as the bear killer month because of the number of bear market bottoms in October. I would love to believe we will see a bottom next week but that will not happen until redemptions stop and reverse into deposits. Money market funds actually saw a rise in deposits last week so maybe that crisis has finally ended. Reportedly investors are moving money to checking accounts and money markets rather than leave funds in brokerage accounts that may be in danger of failing. If funds are waiting patiently in money markets they can be put back into brokerage accounts rather quickly.

The economic calendar for next week contains several key reports but I doubt the markets will be listening. Inflation has eased significantly so the PPI/CPI reports will be less important than normal. The Beige Book and Philly Fed Survey will be of interest since they show the level of economic activity and provide clues about recession possibilities. Traders will be more focused on earnings and the credit crisis but the economics will provide some noise to confuse the analysts.

Economic Calendar

More important than economics will be the earnings from the major tech leaders and a few financials. Intel reports on Tuesday followed by Ebay, IBM and GOOG. Key financials reporting will be JPM, WFC, MER, C and COF. I doubt anyone will beat estimates and we are probably going to see quite a few reporters miss their targets. IBM would be the exception since they already preannounced earnings last week in the range of $2.05 and +4 cents ahead of analyst estimates. Unfortunately they will miss the revenue number by about a billion dollars.

Earnings Calendar

I have already exceeded my word count today so I will keep the outlook brief. The Dow tested support at 8000 twice on Friday with the initial gap down to 7882 lasting only four minutes below 8000. This may look like support but it is simply a round number with no significance. Real support is just below at 7500-7700 and the 2002/2003 lows. As long as local banks don't start failing on a daily basis I would expect the 7500 level to hold. If we are really lucky and the market continues higher on something concrete out of the G7 meeting I won't complain.

Dow Chart - Monthly

The Nasdaq dipped to 1542 on Friday and that is not support either. Real support is well below at 1250 and what would seem like scorched earth selling. With tech stock earnings likely to disappoint the path of least resistance is still down. Just bear in mind we are very oversold.

Nasdaq Chart - Monthly
The S&P-500 came the closest to real support with a drop to 840. Strong support is just below at 800. I can't believe those numbers as I typed them. I expected lower numbers when I last wrote a weekend wrap three weeks ago but I never expected the S&P to go this low. I would be a strong buyer of index calls if the S&P trades near 800.

S&P-500 Chart - Monthly
The Russell-2000 was even more surprising. The index lost almost 300 points from 751 to 467 in only three weeks. Once funds started getting volume redemptions the flight out of the Russell was immediate and drastic. That is a -38% drop in only three weeks. The Russell has strong support at 520 and that is exactly where it closed on Friday. The intraday low was -53 points lower and the Russell rebound was the strongest with a +23 point gain for the day. I would like to think it was fund buyers returning but common sense tells me it was just short covering in the low volume stocks.

Russell-2000 Chart - Monthly

Friday was an all time record for volume at 19.6 billion shares across all markets. Because of the rebound advancing to declining volume was 2:3 and not a clear lopsided capitulation event. Thursday was 1:13 in favor of decliners and could have been the perfect setup for a capitulation event on Friday. I was not convinced but that does not mean next week won't confirm with another move higher.

We are suffering from irrational pessimism and the only cure for that is a suddenly positive market. The doomsayers and media bears are having a field day and you are probably thinking I am in their camp from the negative news I listed above. The difference is that I want the markets to rebound. I want to buy a strong rally if only one would appear and last more than 30 minutes. Once the bad news bulls return to the market the daily dose of negativity will only be stepping stones in the wall of worry they climb. Unfortunately they are still on vacation and waiting for a sign to return. Saturday's urgent IMF warning of an imminent global financial collapse could have negative implications for Monday's open if there is not a comprehensive announcement from world powers before Monday's open.

Jim Brown

Trader's Corner

The Deep Freeze

by Linda Piazza

When my Dallas area trading group met, one frequent topic of conversation was
"What could change that could make our types of trades unworkable?" We believed
in being prepared. Since most of us committed much of our trading capital to
income-producing options trades such as condors, calendars, butterflies and
double diagonals, we discussed scenarios such as volatility levels that dropped
so low that no premium was available. Never, ever did we discuss what almost
happened several
weeks ago. The story that began unfolding the week of September
15 is such a good illustration of how the options markets function that it
provides the basis for a discussion of those workings.

On September 19, the SEC announced a temporary emergency action banning short
selling in a list of 799 financial companies. This followed a September 17
ruling against naked short selling. That previous release had already alarmed
some participants in the options market. The SEC had taken the stunning step of
eliminating an exemption that options market makers had previously enjoyed. The
SEC stated, "The Commission approved a final rule to eliminate the options
market maker exception
from the close-out requirement of Rule 203(b)(3) in
Regulation SHO. This rule change also becomes effective at 12:01 a.m. ET on
Thursday, September 18, 2008.

As a result, options market makers will be treated in the same way as all other
market participants, and required to abide by the hard T+3 closeout requirements
that effectively ban naked short selling." (Release 2008-204)

Options market makers suddenly found themselves exposed to massive risks with
little time provided for them to adjust positions. Because these actions were
being taken on option-expiration week, some leeway was given, with the September
19 order not to go into effect until the Monday after option expiration week.

Why could the options market makers--and traders in the convertible
bond/preferred markets, too--be adversely impacted? When explaining the likely
impact in a September 19 video of "CBOE Options Report with Doctor J," John
Najarian called options market markers "risk transfer vehicles." Najarian
explained that an options market maker must hedge his or her risk or else that
market maker is reduced to the status of "a bookie taking a bet." Options market
makers
don't tend to last long if they don't know how to manage risk, Dan
Sheridan, another frequent CBOE webinar presenter and a former market maker
himself, has often noted.

Options market makers often hedge by buying or shorting stock. For example,
Najarian explained, if a retail trader or institution wants to buy puts, in most
cases, the market maker creates a synthetic put by buying a call and selling
stock. The market maker's goal is to neutralize the market maker's delta and
other risks, with delta risks being the risks that are incurred because of price
movement. If an options market maker is long too many deltas and the markets
move down, that options
market maker's portfolio's losses mount quickly.

Writing as a guest commentator for RealMoney, Michael Kao, CEO and portfolio
manager of Akanthos Capital Management explained the way that traders in the
convertible bond/preferred markets must also hedge. He said that "its main
participants are arbitrageurs who require the ability to short out their equity
exposures for bona fide hedging purposes."

That was the problem that week of September 15 when the SEC changed the rules
with its September 17 and 19 rulings. The SEC's ruling that no shorts would be
allowed in an ever-expanding list of stocks took away the ability of those
convertible bond/preferred market traders and options market makers to engage in
"bona fide hedging" actions. Options market makers were being asked to assume
massive risks to provide an options market without an effective means of hedging
that
risk.

These weren't men, women or firms seeking to drive stocks lower for personal
benefit, but rather people and firms trying to avoid becoming Najarian's "bookie
taking a bet." While some market watchers dismissed concerns about the viability
of the options market, some important operators in the options market didn't.
After these rulings, William J. Brodsky, Chairman and CEO of the CBOE, certainly
didn't. In a Friday September 19 letter, he called the measures "draconian."
He
warned, "Investors rely on a deep and liquid options marketplace in which to
safely hedge and to transfer risk in times of market turmoil, yet this action
will severely compromise the ability of market makers to make markets. Liquidity
in the affected stocks will suffer to the extent that market makers are
hampered, and--absent relief--market makers will be hamstrung." He went on warn
of the "serious ramifications for the reliability of the options market and
for
the efficiency of our capital markets overall."

His warnings weren't exaggerated. Already that Friday, September 19, a Dow Jones
article had noted that several market making firms had avowed to stop trading
options in the financials covered by the SEC's no-shorts ruling. In another CBOE
video produced on September 19, Dominic Salvino of Group One Trading warned that
"A lot of the markets are frozen up." He said, "If you pull up your screen,
you'll see numbers, but it's not so clear what those numbers mean any more."
He
saw "very little" volume in options paper, saying, "The markets are extremely
wide because the market makers are stuck in positions where they can't hedge
themselves, so they're not willing to make markets." He said that information on
options prices and volatility measures should take those numbers with the
proverbial grain of salt.

He and Najarian both said that options market makers might eventually find some
mechanism to hedge. Najarian said it was still possible with small positions
when the market makers might "still trade on strike against another and trade
puts that way," but he warned that wouldn't work with big positions. If a large
order came in, the people in the pits "would scramble like crazy, because they
would have to hit the S&P 500 futures."

Both Najarian and Salvino warned traders to expect very wide spreads on options
come that next Monday, September 22. Some options traders were already noting
widening spreads on Friday, although other factors may have been involved, too.
With markets moving in huge ranges, it was difficult to ascertain whether the
spreads had widened due to the increasing volatility or whether the increasing
volatility and subsequent widening spreads were due to the changes going on in
the markets
prompted by the new rulings.

The CBOE's chairman and CEO wasn't the only person assailing the SEC with
entreaties to reconsider. As a result, on September 21, the SEC issued the
"Statement of SEC Division of Trading and Markets Regarding Technical Amendments
to Short Sale Order." That amendment was made to "ensure the continued smooth
operation of orderly markets." That was accomplished by the SEC's new decision
to "keep in place the exception contained in the original order for short
selling
related directly to bona fide market making in derivatives, including
over-the-counter swaps." The SEC tacked on a requirement that Najarian was to
conclude required market makers to be psychic ("The Options Report with Doctor
J," CBOE, September 22). That rule required that "for new positions, a market
maker may not sell short if the market maker knows a customer or counterparty is
increasing an economic net short position in the shares of the Included
Financial
Firm."

Market makers were saved, but they'd been scalded by various actions taken
during that week. So had the traders in the convertible bond/preferred markets,
Kao claimed.

Fascinating, isn't it, to learn how close we all came to unintended consequences
that could have undermined the health of the options markets. What's the message
for us? For now, options prices on some underlyings do appear to have widened.
Salvino warned that "the bid/ask spread, as wide as it is now, it's tripled
their [retail traders'] transaction costs. Instead of paying $0.20 on the
bid/ask spread, they have to pay $0.60. That means they have to be awfully
right."

Therefore, until things settle down, your options trades should be the results
of the best trading setups you can find. This is no time for iffy trades. Market
makers were willing to shut down completely rather than accept too much risk,
and we retail traders should take our cue from them.

We should take the cue in more than our short-term options trades, too. We
should consider the way that options market makers try to hedge against as many
risks as they can: delta risks due to changes in price, theta risks due to the
march of time and vega risks due to volatility changes. Perhaps it's time for us
to educate ourselves about such risks in our portfolios and see what we can do
to ameliorate them.

Index Wrap

MADNESS OF CROWDS AND STAMPEDING BEARS

by Leigh Stevens

THE BOTTOM LINE:
Or is it the bulls that normally 'stampede'? Bears charge when smelling blood or
danger I believe but I myself have only faced the Wall Street kind.

A couple of key aspects to this current market meltdown that I wrote about last
week, were that I thought that certain indicator extremes would be seen before
prices started bottoming out. The PRICE level at which even an interim or
temporary bottom would form in such a 'waterfall' decline is very hard to
project. I thought then (last week) that we would be looking at possible test of
lows seen back in 2004 and '05. NOT! The S&P 500 (SPX), down 200 points on the
week, is instead
getting close to hitting it's 2002 low.

I've noted for awhile now that the major indexes are as oversold as they've been
in decades on a weekly chart long-term basis, as highlighted above (yellow
circle) with the SPX 13-week Relative Strength Index (RSI).

In an over the cliff waterfall decline like this and a major panic like not seen
in decades, prior lows as possible support levels give way like a knife through
soft butter. To offset the unknowns regarding what price levels might signal
buying interest and a bottom, I rely on some key technical type INDICATORS (RSI
and 'sentiment') as far as 'signaling' the conditions where the major indexes
are ripe for a turnaround.

Both key conditions were met finally this past week; in one (my extreme bearish
'sentiment' indicator), only on Thursday (and then again on Friday) as traders
finally got as bearish appears warranted by the market free fall. The conditions
suggesting the market is ripe for stabilization and a potential bottom will be
discussed as part of my commentaries with the major index charts below.
Paraphrasing from LAST WEEK:

"In terms of charts and indicators, there are things I anticipate relative to a
next bottom:

** Almost certainly, trader sentiment is going to get MORE bearish than it is
now in terms of call to put readings; i.e., the ratio of total daily equities
call volume relative to total daily put volume.

** ...indicators like RSI, on a DAILY chart basis, are going to get 'fully'
oversold just as the WEEKLY chart RSI is showing already..."

Those holding index puts need to assess the possibility that the major indexes
WILL stop their free fall at some point (maybe it's started) and are due for a
rebound such as was seen after the sharply lower Friday opening. Even if rally
attempts are short-lived, most of profit in index puts may be realized by now.

The panic phase is not quite the end of major bear markets. After panic comes a
surrender or disinterested phase where investors just don't want to hear about
stocks, don't want to look at them and don't want to open their statements.
We're seeing some of this now to a greater extent than last week. This phase
tends to go on for a lengthily period but tends to end the panic free-fall
stage.

SHORT SELLING RESTRICTION LIFTED THURSDAY
The most notable example of renewed shorting appeared to occur with Morgan
Stanley and in the insurance sector. Insurance stocks tend to hold the highest
quality stocks, but even the best of them go down with a sinking ship. As
Charles Dow used to say, the rising or falling tide lifts or drops ALL boats.

My commentary will by necessity be concise and to the point (less long-winded?)
than might be the case if it were not that I am writing this between breaks in a
seminar I'm participating in this weekend. I am forgoing the pool, the outings
on the green and all that, in order to try to make a little bit of sense out of
the current madness. I was going to skip my column all together, but duty calls!

QUESTIONS/COMMENTS:
Please e-mail me with any questions or comments at
Click here to email Leigh Stevens
support@optioninvestor.com and put "Leigh Stevens" in the subject line.

MARKET NEWS and INFLUENCES:
Other index and sector closes, recaps of market influences like earnings,
company news, related market events, government reports and activities, etc. are
found in the Option Investor 'Market Wrap' section.

** MAJOR STOCK INDEX TECHNICAL COMMENTARIES **

S&P 500 (SPX); DAILY CHART:

A projection out into the future of the current or past rate-of-change in prices
(i.e., a trajectory of price 'momentum') is what a trendline is. As of the close
on Thursday, the S&P 500 (SPX) had even fallen under its prior most negative
prior rate of downward momentum, as measured by its rate of decline in
June-July. This is represented by SPX having pierced the downward red (dashed)
trendline highlighted below. This move finally put the 13-DAY RSI into a 'fully'
oversold condition
which is one of indicator events that I thought would occur
BEFORE a bottom was seen, even if only an interim one.

I noted last week that the 13-day RSI had not gotten fully oversold, unlike the
extreme seen in the weekly chart as of the prior week already. Now however, the
13-day RSI is 'fully' oversold as highlighted at the yellow circle on the lower
portion of the chart. Because it was so unusual to see the prior mismatch in
oversold indicators between the weekly and daily chart RSI indicators it was
also a key reason why I thought last week that the market had significantly more
to go on the
downside. In a market of 'extremes', EVERYTHING (all indicators)
will get extreme. I can't point to an exact principle at work here, just
something that experience suggests to me.

I've noted near resistance on the daily SPX chart at 1020 to 1050. Potential
support begins around 840, extending to 800. I'm not showing it on the chart,
but SPX support should also be found at 775. Multiple lows in the July 2002 to
March 2003 occurred in the 800-775 price zone and suggests support in this area.

S&P 100 (OEX) INDEX; DAILY CHART

The other 'extreme' (besides in the 13-day RSI) that I expected to see before
the market bottomed is highlighted on the lower portion of the S&P 100 (OEX)
chart below, which is the bearish 'oversold' extreme on my trader sentiment
indicator. The market will tend to prolong declines UNTIL there is day or
cluster of days when CBOE daily equities put volume equals or exceeds daily call
volume.

This recent market saw a very steep decline before traders got convinced that
the market was not going to rally 'any day now' and to start betting on further
downside potential. We can't of course assume that all put activity is buying,
since shorting puts is also a way to bet on the underlying stocks being at or
near a bottom. Nevertheless, such declines in the CPRATIO line ratio has proven
over many years to be a contrary indicator, suggesting that the major indexes
are close to
a bottom; e.g., within 1-5 days after such daily extremes, which is
reinforced by the drop in the 5-day moving average into the same 'oversold'
zone.

Support is in the 400 area, extending down to 385 at the green up arrow.
Resistance is at 480, then at 520.

DOW 30 (INDU) AVERAGE; DAILY CHART

You'll see again on the Dow 30 Average (INDU) how the recent downside
acceleration has taken prices even under the prior rate of decline or downside
momentum as highlighted by the red down trendline. This is another way of
looking at how oversold this market and INDU is.

Near resistance is at the aforementioned (down) trendline, at 9000, then at 9600
and finally at 10000, which will likely to prove to be fairly major resistance,
this level having reversed its role as (previous) 'major' support.

Near support/buying interest was seen in the 8000 area, with next support
probably coming in around 7500.

NASDAQ COMPOSITE (COMP) INDEX, DAILY CHART:

The Nasdaq Composite Index (COMP) hasn't fallen quite so far below what I would
normally see as 'support' implied by the lower end of its downtrend channel.
COMP hasn't gotten as oversold in terms of the 13-day RSI as at its
late-June/early-July bottom and Nasdaq stocks may see the best initial buying
interest in terms of when portfolio managers and individuals get up some
conviction again on stock prospects.

In terms of prior historical lows at least going back to the region where COMP
bottomed in 2003, I can't point to potential support based on the long-term
weekly charts (not shown) until around 1350 to 1300 and that is still some
distance lower. I doubt that tech stocks are going to get pushed down that far
but I didn't think they would get this far either! It's only a guess as to where
COMP turns around price wise.

Resistance is easier to measure: at 1800, then at 1900.

NASDAQ 100 (NDX) DAILY CHART:

The Nasdaq 100 (NDX) has gotten very oversold relative to ITS last significant
bottom. If there was one index call to play in a probe of the long side, NDX
looks like it could be the best play for a bounce.

I've noted support at 1100, but I think INITIAL support has already been
successfully tested at 1200. Major support is at 1000.

Near resistance is in the area of the recent downside gap, around 1440, with
next likely resistance coming in at 1500.

RUSSELL 2000 (RUT) DAILY CHART:

Support in the Russell 2000 (RUT) developed in the 470 area late this past week.
I've noted next support down in the low-400 area. Needless to say, RUT is also
very oversold, which at least implies favorable 'conditions' for a rally in this
group of stocks. Oversold or not, there still has to be a significant number of
buyers willing to take some money from under the mattress and exchange that
green for stock. While the major big-cap stocks are still suspect, there may be
some decent
buying interest in RUT.

Resistance comes in at 600, then even stronger resistance is implied by the line
of prior support at 650; support, once broken, 'becoming' resistance later on.

Trading suggestions are based on Index levels, not a specific option (month and
strike price) and entry price for that option. My outlook often focuses on the
intermediate-term trend (next few weeks) rather than the next several days of
the short-term trend.

Having at least 3-4 weeks to expiration tends to be my guideline for trade entry
choice. I attempt to pick only what I consider to be 'high-potential' trades;
e.g., a defined risk point would equal in points only 1/3 or less of the index
price target.

I most often favor At (ATM), In (ITM) or only slightly Out of the Money (OTM)
strike prices in order not to 'overtrade' my account. Exit or 'stop' points, as
well as projected profitable index price targets, are based on my technical
analysis of the indexes.

New Plays

New Option Plays

by James Brown

Play Editor's note: There is still a lot of uncertainty
and fear in the markets and stocks could still go lower even though Friday had a
lot of potential to be a significant bottom. The best trade is probably to sit
on the sidelines. The dust hasn't even begun to settle yet. FYI: Keep an eye on
AAPL. If AAPL trades over 101.50 it might be a buy. I'd even consider buying
calls on another dip to $85.00 with a tight stop! I'd also watch CF, which is
another fertilizer stock. Shares have
been showing a little relative strength
lately.

New Calls

Mosaic - MOS - close: 36.40 change: -0.12 stop: varies

Company Description:
The Mosaic Company is one of the world's leading producers and marketers of
concentrated phosphate and potash crop nutrients. Mosaic is a single source
provider of phosphates and potash fertilizers and feed ingredients for the
global agriculture industry. (source: company press release or website)

Why We Like It:
MOS is part of the fertilizer-chemical industry and the group appears to be
forming a bottom. Stocks in this group have been trading in a sideways range
after some massive declines in the last four weeks. We want to be ready if MOS
makes a move. However, we're listing two different entry points. There is a good
chance that MOS dips toward the bottom of its range again. Our preferred entry
point would be to buy a dip in the $33.25-32.00 zone with a stop loss at $29.95.
More conservative
traders could use a stop loss at $31.35 instead. Our
alternative entry point, if MOS rallies from here, is to buy calls at $42.15
with a stop loss at $37.90. Our first target is $49.00. Our second target is
$59.00.

New Puts

None today.

New Strangles

CBOE Volatility Index - VIX - cls: 69.95 chg: +6.03 stop: n/a

Company Description:
The CBOE Volatility Index - more commonly referred to as "VIX" - is an
up-to-the-minute market estimate of expected volatility that is calculated by
using real-time S&P 500 Index (SPX) option bid/ask quotes. VIX uses nearby and
second nearby options with at least 8 days left to expiration and then weights
them to yield a constant, 30-day measure of the expected volatility of the S&P
500 Index. (CBOE website)

Why We Like It:
We're not suggesting a strangle but a spread on the VIX - actually two of them
depending what your time frame is. Market volatility has surged to all-time
historic highs. This isn't the best time to buy options (volatility) but to sell
volatility. What better vehicle to sell options on but the VIX, which by its
nature always reverts back to its mean. Granted there are never any guarantees
but odds for this play are pretty strong.

Here's the plan. We cannot conceive that the VIX can maintain its position this
high for very long. It can stay elevated (a.k.a. above 30) for a while but no
way it's staying up near 70% volatility. We're listing two different plays. One
uses October options. The other uses November options. We are selling some deep
in the money calls and buying much higher calls as a form of insurance should
the unthinkable happen. We'll collect the money on selling the deep in-the-money
calls, which
will sit in our account until we decide to exit the play and buy
them back or until the options settle. As the VIX contracts the premiums on all
of these options will collapse.

Note: VIX options are European style options that settle for cash at expiration.
Furthermore VIX options have unique expiration dates. October options expire on
Wednesday, October 22, 2008 and will stop trading on Tuesday, Oct. 21. November
options expire on Wednesday, November 19, 2008 and will stop trading on Tuesday,
November 18th.

Note on Margin - Here's what the CBOE website has to say about margin:
"Purchases of puts or calls with 9 months or less until expiration must be paid
for in full. Writers of uncovered puts or calls must deposit / maintain 100% of
the option proceeds* plus 15% of the aggregate contract value (current index
level x $100) minus the amount by which the option is out-of-the-money, if any,
subject to a minimum for calls of option proceeds* plus 10% of the aggregate
contract value and
a minimum for puts of option proceeds* plus 10% of the
aggregate exercise price amount. (*For calculating maintenance margin, use
option current market value instead of option proceeds.) Additional margin may
be required pursuant to Exchange Rule 12.10."

Suggested Options:
We are listing two different plays.

VIX spread #1 with October options:

We want to SELL the October 40 calls (bid is $16.70) and BUY the October 60 (ask
$5.60) as a hedge against the VIX remaining elevated.

Play Updates

Updates On Latest Picks

by James Brown

Call Updates

DIAMONDS Trust - DIA - close: 83.75 change: -1.80 stop: n/a

I won't repeat the obvious about how volatile Friday was. I do want to point out
that the DIA gapped open lower at $82.39, which gave us a better entry point. If
you were able to buy the dip near $80.00 then things look even better. The
intraday bounce and the massive volume on DIA could be signs of a bottom but
there are no guarantees. Right now, I would wait for another dip into the
$81.00-80.00 zone before buying new (very speculative) October calls on the DIA.
Instead of aiming
for $95, if you're buying calls around $80, I would plan to
exit in the $89-90 zone. We are going to adjust our exit strategy and set our
first target at $89.50 and our second target at $95.00. Remember, these are very
risky bets. October options expire in five days.

Suggested Options:
We are gambling on a bounce with out of the money October calls, which expire in
five days.

Stocks continued to crash on Friday morning and the QQQQ actually gapped open at
$30.52, providing a better entry point for our very speculative bounce play. The
trend is still down but we're so oversold we're way overdue for a correction
higher. You could argue that this play is relying on the gambler's fallacy,
which suggests that the market has been "red" eight days in a row then it's time
to bet on "black" to use a roulette analogy. I would counter that we've
had a
constant string of bad news and uncertainty for eight weeks straight. How much
worse can the news get that hasn't already been factored into the market at
these prices. Our biggest risk here is time frame. We are gambling on a bounce
before October options expire. If you're nimble, try opening positions on
another dip near $30.00 again. Currently our target is $35.00.

Suggested Options:
We are betting on the October calls, which expire in five days time.

Picked on October 09 at $ 31.52/gap open 30.52
Change since picked: + 0.80
Earnings Date 00/00/00
Average Daily Volume = 195 million

Put Updates

ITT Educational Servc - ESI - cls: 69.10 chg: +3.10 stop: 73.30*new*

Shares of ESI came pretty close to our secondary target at $61.00. The intraday
low on Friday morning was $62.77. The stock actually appears to be showing a
little relative strength. It closed up sharply on Friday afternoon and didn't
seem the same early afternoon Friday meltdown that the wider market did. We are
adjusting our stop loss lower to $73.30. We're not suggesting new put positions
at this time. ESI has already hit our target at $67.50.

Suggested Options:
We are not suggesting new put positions in ESI at this time.

This never-ending ramp up in the volatility index will eventually collapse. It
may not happen all at once but it will revert back to its normal trading range.
We are facing the possibility that the VIX could trade at an elevated level for
a few weeks like it did back in 2002 and 1998 but odds are against it. Of course
this past week has been a week against the odds with record-breaking moves in
the market and record-breaking highs for the VIX. We're not suggesting new put
positions
even though Friday's high for the VIX was an all-time high. Due to
these extreme highs in volatility option prices are hugely inflated and we are
basing some new plays on that fact. Check out our new play section.

Note: The VIX options, which are European style options, have a unique
expiration date. October VIX options expire on October 22nd, 2008. November VIX
options expire on November 19th, 2008. The last day of trading for these options
is the Tuesday before expiration. For more information
check this link.

Our September 16th put position (suggested entry at 30.30) has a 25.50 target.
In all honesty this position may be dead. We still have plenty of time with
these next two. The September 29th position (suggested entry at 46.72) has two
targets at 36.00 and 31.00. Our October 8th position (entry 57.53) has two
targets at 40.00 and 35.00.

Suggested Options:
We're not suggesting new positions at this time.

Picked on September 16 at = 30.30 first position
Change since picked: +39.65
Picked again Sept. 29 at = 46.72 second position
Changed since picked: +23.23
Picked again Octo. 08 at = 57.53 third position
Changed since picked: +12.42
Earnings Date 00/00/00
Average Daily Volume = --- million

Strangle Updates

None

Dropped Calls

Cisco Systems - CSCO - close: 17.23 change: +0.04 stop: 16.45

We have good news and bad news with our attempt at buying CSCO near support. The
bad news is that CSCO blew through support in the $17.00-16.80 zone and hit our
stop loss at $16.45. The good news is that CSCO gapped open lower on Friday at
$16.49. The play was over in seconds. At this point I would keep an eye on CSCO
and might be tempted to buy calls if shares can trade over $18.25 or $18.50.

Everyone knew that FCX has been volatile lately but Friday's gap down to $34.81
was very painful. Shares actually hit a low of $32.50 before bouncing back. I do
think that there will be a great opportunity to bet on FCX rising in the future
but that opportunity may be closer to the 2005 lows around $30 or the 2004 lows
near $28.00. We would have been stopped out at the open on Friday.

Dropped Puts

Hasbro Inc. - HAS - close: 30.00 change: +1.26 stop: 32.05

Target exceeded. The market's gap down on Friday morning led shares of HAS to
open at $27.63 and then fall to $27.02 before bouncing back into the green. Our
target to exit was $27.65. The overall trend in HAS remains very bearish with
its H&S pattern so we'd keep an eye on it for another opportunity. When the
market eventually bounces HAS could struggle as it nears overhead resistance.

Dropped Strangles

None

Today's Newsletter Notes: Market Wrap by Jim Brown, Trader's Corner by Linda
Piazza, Index Trader by Leigh Stevens, and all other plays and content by the Option Investor staff.

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